Sales and settlement risk in a difficult market | Part 2 – Do your plans measure up?
In the current market, we are seeing an increase in purchasers challenging measurements and dimensions on plans in off-the-plan sales, often claiming that the property purchased is smaller than the product they believed they purchased off-the-plan.
Developers often now seek our advice on whether, and how, they should include indicative measurements and lot sizes in their contracts of sale or on marketing materials. We share below the legal issues which we have seen arise in the current market.
Possible methods of measurement
There is presently no legally prescribed method of measurement for the measurement of land or built form sold off-the-plan. However there are 4 methods that we have typically seen used in projects:
- PCA Method of Measurement (PCA Method) - Residential or Commercial, depending on product type;
- Title area;
- interior face of wall to interior face of wall; and
- net or gross lettable area.
The PCA Method is perhaps the most frequently used method, particularly for residential sales. The PCA Method for residential properties measures to the median of walls adjoining other lots and to the external faces of external walls or walls adjoining common property.
For off-the-plan sales for non-residential product, such as industrial, retail or office, the area of land that a purchaser is buying may often be specified. That specification is typically accompanied by a price adjustment mechanism if the actual area is less or more than the proposed area, along with a termination right if the area variance is above or below pre-agreed limits.
For off-the-plan residential sales, typically measurements are not included on floor plans in contracts of sale and disputes often arise.
Indicative measurements may be included in marketing material presented to purchasers before the contract is signed. This could be in the display suite or in marketing brochures and collateral. It is important that it is clear on marketing plans, and in the contract terms, the method by which the size of the lot is determined, as different methods can yield different results. This can potentially jeopardise the sale by claims from purchasers for rescission, compensation for perceived loss of area, or allegations of misleading or deceptive conduct under the Australian Consumer Law.
In Birch v Robek & Anor  VCC 68, a purchaser of an off-the-plan apartment claimed the return of the deposit and tried to rescind the contract of sale following an inspection carried out by a surveyor of the internal area of the apartment. The facts were very specific in this case. It does, however, highlight issues with plan measurements that a developer would rather not spend time and money on disputing with a purchaser.
In this case, the purchaser’s surveyor’s measurements did not use the PCA Method. It used the interior face of wall to interior face of wall method. The purchaser claimed that these measurements revealed the apartment was significantly smaller than what was represented in a marketing material brochure provided to the purchaser (parts of which were also attached to the contract).
Confusingly, that marketing material showed measurements according to the PCA Method, as well as the interior wall to interior wall method. It was not clear which area the developer represented it would actually use. Ultimately, the difference in area meant the purchaser could not obtain finance to complete the purchase, as the area was alleged to be less than 40sqm.
As there is no uniform method of measurement, the Court in their judgement said it is imperative to “examine the contract to ascertain what was really the subject matter”, and if in reality the purchaser can be said to be obtaining that subject matter. Despite the numerous disclaimers in the contract that the vendor sought to rely on, the combination of the annexed marketing plans and the generic description contained on the plan of subdivision noting boundaries were to the ‘interior face’ ultimately entitled the purchaser to rescind and to a return of their deposit.
For non-residential off-the-plan sales, clearly draft the agreed regime if a target area is specified (to include price adjustment and/or termination mechanisms if the actual area is different to the target area).
For residential off-the-plan sales, we have seen purchasers using the Birch and Robek case in the current market to try and get out of a contract if there is any opportunity to argue a size discrepancy, even if the facts are different. To remove that opportunity, and/or mitigate risk if any claim is made by a purchaser, developers should consider the following when launching a project:
- If indicative measurements and lot sizes are to be given to purchasers, be clear on the method of measurement that is used in all collateral given to a purchaser (marketing material and any contract drawings).
- If there is a dispute over measurements, be clear as to the method of measurement that the parties agree should be applicable in such a dispute.
- Well drafted disclaimers and contract terms are important to help mitigate risk – silence can be fatal.
- Representations by sales agents as to size can also potentially lead to claims for misleading conduct under the Australian Consumer Law. Make sure your agents follow the script.
Looking for more information on sales and settlement risk?
Read Sales and settlement risk in a difficult market - Part 1
FIRB – Reforms to Australia’s foreign investment framework
The emphasis of the FIRB reforms is on national security risks, the approval process and administrative enhancements.
Victorian COVID-19 Commercial Tenancies Legislation & Regulations
This article explains the COVID-19 Omnibus (Emergency Measures) Act 2020 (the Act).
COVID-19 new witnessing of documents regulations – what does this mean for NSW property transactions and verification of identity?
By Alicia Albury & Susanne Rakoczy
Information on what the regulation means for NSW property transactions and verification of identity
Victorian COVID-19 Commercial Tenancies Legislation
Has it clarified the outstanding queries arising under the Mandatory Code for Commercial Tenancies